Financial Management Challenges In Small and Medium-Sized Enterprises:

A Strategic Management Approach

Hande Karadag
Wharton School, University of Pennslyvania, Sol C. Snider Entrepreneurial Research Center, |
email: hkaradag@wharton.upenn.edu

Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu |

Abstract

Due to their significant role in creation of new jobs, rise in GDP, entrepreneurship and innovation, small and medium-sized enterprises
(SMEs) are recognized as the drivers of socio-economic growth, both in developed and developing economies. In Turkey, 99.9 % of all
enterprises fall into SME category. Therefore, the significance of SMEs for Turkish economy and society is much higher in Turkey,
compared to other emerging and developed countries. Small and medium-sized companies are faced with a number of challenges whereas
the problems arising from “poor financial management” are reported as the major causes of business failures in SMEs. Strategic financial
management (SFM) which is a research area that has attracted the interest of researchers after 2010, is one of the key managerial areas of
SMEs, due to its vital role on the survival, growth and performance of SMEs. The purpose of this paper is to analyze the central role of
financial management and identify the financial management challenges and practices that influence the organizational performance in
Turkish SMEs, from a strategic management perspective. Within the course of this paper, the importance and challenges of SMEs in
Turkey are presented in the first section, while the literature on strategic and financial management in SMEs is reviewed in the second part.
In the third section, the recent strategic financial management concept, the implications of strategic financial management practices for
SMEs in Turkey and the relationships between strategic financial management practices and SME performance, are discussed. Small and
medium sized enterprise finance in Turkey is a developing research area; therefore this paper aims to make a significant contribution to the
existing literature by analyzing the major challenges at the conduct of financial management in Turkish SMEs and the influence of
strategic financial management practices on the performances of small and medium sized companies in Turkey. Additionally, the
conceptual framework developed is expected to be useful to academics in developing an agenda for future empirical research.
Keywords : SMEs, financial management, strategic management, strategic financial management (SFM) practices

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Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
Financial Management
Challenges In Small and
Medium-Sized Enterprises: A
Strategic Management
Approach
Hande Karadag
1. Introduction
Small and medium sized enterprises (SMEs) form
a large part of economy and are regarded as the drivers of
socio-economic development in all countries. In OECD
countries, over 95% of all enterprises fall in the SME
category, while over 50% of the private sector employment
is supplied by SMEs (Lukacs, 2005). Although most of the
enterprises in all countries are SMEs (Özdemir, Ersöz &
Sarıoğlu, 2011) the interest to micro, small and medium-
sized companies both among practitioners and academics is
quite recent. The importance of SMEs in the economy has
been widely recognized after 1980’s, as the focus shifted
from large corporations smaller sized enterprises. Since
then, these economic units are regarded as the core of
developmental macro and socioeconomic policies on both
national and international levels.
In Turkey, the significance of SMEs is relatively
higher, which is caused by not only their large share,
amounting to 99.9% of all formally declared businesses in
the economy, but also from their resilience to the shocks in
turbulent Turkish macro economy. Turkish SMEs, which
were faced with serious challenges during and after the
severe economic crises that hit the Turkish economy within
the last three decades, increased their share in the economy
significantly, while Turkish government took radical steps
towards attaining a more stable macro economy and
sustainable growth. During that restructuring period, SMEs
became one of the key elements of the macroeconomic
improvements in Turkey, due to their significant role in the
growth of overall GDP, new job creation and exports.
Despite the positive outlook and growth trends of
the sector, SMEs in Turkey, as in most developing
economies, are faced with a number of challenges, such as
insufficient managerial skills, lack of trained personnel,
poor access to financial resources and low utilization of
new technologies. Among these, lack of an efficient and
effective financial management system is a core problem
area for Turkish SMEs. As financial management is the
centre of the overall management system in a small
business (Meredith, 1986) the ineffectiveness and
inefficiencies of financial conduct have detrimental effects
on the longevity and performance of an SME. As most
Financial Management Challenges In Small and
Medium-Sized Enterprises: A Strategic Management Approach
problems of SMEs have a financial nature (OECD, 2006),
poor financial management is a critical and common cause
of business failures in SMEs (Jindrichovska, 2013).
Particularly lack of financial management knowledge
combined with uncertainty of the business environment
often leads SMEs to face serious problems regarding
financial and overall performances, which can even
threaten the survival of the enterprise (Kaya & Alpkan,
2012).
As Turkey is a developing country where
insufficient levels of equity capital and poor access to
external finance are considered as the major financial
challenges for SMEs (Öndeş and Güngör, 2013; Şahin,
2011; Çetin, Akyüz and Genç, 2011; Güler, 2010;
Koyuncugil and Özgülbaş, 2008), previous literature on
financial characteristics of Turkish SMEs focused mainly
on financial problems of small and medium sized
companies with respect to their funding requirements
(Uluyol, 2013; Koyuncugil & Özgülbaş, 2008; Topal,
Erkan & Elitaş, 2006; Arslan, 2003), the research area of
financial management practices in SMEs in Turkey has
been significantly neglected up to date. Therefore, this
paper aims to make a contribution to the literature by
analyzing the major financial management challenges of
SMES in Turkey, and the practices of financial
management which are closely related to SME
performance, in other terms, which have a “strategic”
importance in terms of improving or worsening the
performance of the SME. The conduct of financial
strategies formulated by the owners and/or managers of the
enterprises is a concept which can show variations among
different contexts, as which financial practices are more
common or more strategic importance in the overall
financial management of SMEs can differ from one setting
to another, depending on the development of the context of
corporate sector (Butt, Hunjra and Rehman, 2010).
However, the questions regarding how these practices can
be identified within their own contexts and used as strategic
tools for overcoming the financial and overall managerial
challenges and attaining a higher organizational
performance, have not been investigated in depth. Thus, as
an additional contribution, the conceptual framework
developed within this study can provide a basis to
academics for future empirical research. Within the course
of the paper, Section 2 briefly reviews the literature on the
concept of SME and the importance and challenges of
SMEs in Turkey. Section 3 starts with the analysis on
strategic management in SMEs, and continues with
identification of strategic financial management practices in
small and medium sized companies, both in international
and local contexts, by introducing a “strategic management
model of financial practices in SMEs”. The details of the
model constructs as well as their role on the overall
performance of the SME are presented in the same section.
The implications of strategic financial management
practices for academics and practitioners are discussed in
section 4.
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Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
II . Significance and challenges of SME sector in
Turkey
The SME concept
There are different categorizations of small and medium-
sized enterprises due to varying socio-economic conditions
of each economic region or country focused. While Storey
(1994) argues that “there is no single definition” of the
SME concept, Bolton Committee Report (1971) describes
SMEs as the “enterprises with a relatively small share of
the market, managed by owners or part-owners in a
personalized way, and not through the medium of a
formalized management structure; and acting as separate
entities, in the sense of not forming part of large enterprise
or group” (Bolton Report, 1971). SMEs and
entrepreneurship are accepted “to be a key source of
dynamism, innovation and flexibility in advanced
industrialized countries, as well as in emerging and
developing economies” (OECD, 2006). SMEs are called as
the “backbone of the European economy” as they constitute
98% of all enterprises with a total of 20.7 million
businesses and account for 67% of total employment and
58% of gross value added in European Union, as of 2012
(EC,2012).
The role of SME’s in social and economic
development has been widely recognized in developed
countries as well as developing economies (OECD,2006)
particularly after 1980’s. SME development is “closely
linked with growth” (Ardiç, Mylenko and Saltane, 2011;
Beck, 2010) as the researchers found out “a robust, positive
relationship between the relative size of the SME sector
and economic growth, even when controlling for other
growth determinants” (Ardıç, et al., 2011; Beck, 2010).
Apart from their role in GDP growth, SMEs have other
significant socio-economic characteristics such as their
contribution to new job creation and reduction of poverty.
The potential economic and social benefits of SMEs can be
stated as “creating jobs at low cost of capital, contributing
positively to the Gross Domestic Product (GDP),
improving forward and backward linkages between sectors,
creating opportunities for employing appropriate
technology, providing an opportunity to expand the
entrepreneurial base, expanding a pool of skilled and semi-
skilled workers, providing support to large-scale
enterprises, providing the required flexibility to adapt to
market failures, entering into market niches which are not
profitable for larger enterprises, contributing to
development policies that are more oriented towards
decentralization and rural development, supporting
governments’ efforts alleviate the negative aftermath of
structural adjustment programs” (Zonooz, Farzam, Satarifar
& Bakshi, 2011; Tolentino, 1995).
Small and medium-sized companies are often
viewed as being more innovative than larger firms and
considered to follow niche strategies in developed
countries, while adopting “high product quality, flexibility
Hande Karadag
Emerging Markets Journal | P a g e |27
and responsiveness to customer needs as means of
competing with large-scale mass producers” (Hallberg,
2000; Snodgrass and Biggs, 1996). SMEs emerged as the
key economic actors in both developed and developing
economies, within the last three decades, particularly due to
the shift towards a more global business context and
developments in information technologies.
Despite their several advantages over large-sized
competitors, small and medium sized enterprises have
weaknesses and challenges of their own. Zimmerer and
Scarborough (2005) state “managerial mistakes, failure to
develop a strategic plan and poor financial control” among
the most important reasons of business failures in small
businesses, ranking “poor management” as the primary
cause. Among various problems of SMEs, financial
challenges have a unique situation as, according to OECD
reports, most problems of SMEs have a financial nature
(OECD, 2004, 2006). In the study performed by Hall and
Young in UK (1991), 86,6% of the respondents reported
that, the reasons of their business failures had a financial
nature (Hall and Young, 1991). The correlations between
outcomes of the financial strategies and decisions and the
performance of the enterprise have also been well
documented by various researchers (Salazar, Soto and
Mosquedo, 2012). SMEs in developing economies are
more prone to experiencing finance-related difficulties,
particularly with respect to external funding (OECD, 2006).
SMEs in Turkey
According to the bylaw dated 04.11.2012 and published in
the Official Gazette of Turkish Republic, the SME
definition in terms of employee number and annual revenue
in Turkey is as follows:
Number of Annual
employees turnover
Micro Enterprises < 10 < 1 million TL
Small Enterprises < 50 < 8 million TL
Medium-sized < 250 < 40 million TL
Enterprises
SMEs are the most significant tools for economic
development, gross domestic product and workforce in
Turkish economy (Nurrachmi, Abd Samad & Foughali,
2012). There are a total of 3,222,133 small and medium-
sized enterprises in Turkey, which constitute 99.9% of all
enterprises, while 76% of total employment, 53% of total
wages and salaries, 63% of annual sales turnover, 53.3% of
value added at factor cost and 53.7% of gross investment
intangible goods are supplied by SME sector (Turkstat,
2013). According to main groups of industry, 40.8% of
SMEs operate in wholesale and retail trade together with
the repairing of motor vehicles and motorcycles, while
16.4% operate in transportation and storage industries and
12.8% work in manufacturing industry. The percentage
share of SMEs within the total exports is 62,6% in 2012,
Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
rising from a 56% in 2009, where the share of micro
enterprises is 20.6%, small enterprises is 24.3% and
medium-sized enterprises is 17.7% in total exports. The
proportion of the SMEs’ export and import volumes
indicate the contribution of SME sector to the balance of
payments deficit of Turkish economy, as the percentage
share of SMEs in total exports is 38.5% in 2012, compared
to their % 62,6 share in total exports.
Despite their vital importance within the
economy, SMEs in Turkey are faced with major challenges.
While common problems of SMEs particularly in
developing economies are mainly reported as insufficient
use of new technologies, lack of business related training,
inadequate managerial capabilities, high rate of taxes and
other bureaucratic problems (Abdulsaleh and Worthington,
2013, Ardıç, et,al, 2011), KOSGEB, which is the main
public body responsible from SMEs, reported the basic
challenges experienced by SMEs in Turkey, as follows
(KOSGEB, 2012) :
Technology and innovation Insufficient know-how and low
levels of technology are common in most Turkish SMEs.
Most manufacturers in Turkey currently operate in
medium-low and low level industry sectors, reaching to a
very high percentage of 89%, which prevent them from
benefiting low cost advantage. Low regard for innovation,
due to high costs of R&D, is a major cause of low levels of
technology of SMEs. SMEs face various challenges when
conducting R&D projects and realizing business ideas
which can be turned into business opportunities. In 2012,
16.6 percent of R&D expenditure was performed by SMEs
and regarding R&D personnel distribution, 25.3 percent
was employed in SMEs (Turkstat, 2013).
Marketing and Exporting: As lack of information on
foreign market opportunities, inadequate financing and
technical knowledge lower the competitiveness of products
and services, SMEs in Turkey mostly target the domestic
market.
Entrepreneurship: With its young demographic structure,
Turkey has a significant but mostly unutilized potential for
entrepreneurship, where the main causes are insufficient
technical knowledge on preparing business plans and
difficulties in finding the startup capital, needed to
undertake the high costs of launching the business.
Environment: In Turkey, as in most parts of the world, the
demand for environmentally-friendly products and services
is increasing. However, the complexity of environmental
legislation and the height of costs to comply with the
legislation are discouraging the SME owners and
entrepreneurs from meeting that demand.
Labor: Due to high percentage of social security premiums,
cost of skilled labor in Turkey is higher than most
developing economies. This, combined with low levels of
education and technical capabilities of employees, creates a
major disadvantage for competitiveness of SMEs.
Financial Management Challenges In Small and
Medium-Sized Enterprises: A Strategic Management Approach
Administrative costs and burdens: The complexity and cost
of bureaucratic transactions and the costs of launching a
new business are also among the major challenges SMEs
face in Turkey. While significant developments have been
made regarding the attainment of a more SME-friendly
business climate and “simplified legislative procedures”,
reduction of red-tape is an important issue for new venture
launches and encouraging entrepreneurship. Among other
countries, Turkey ranked as the 69rd in the “World Bank
Doing Business Report”(Worldbank,2014). However, at the
ranking of “starting a business”, the country’s rating fell
significantly from 73. place to 93 between 2013 and 2014,
resulting mainly from the high costs of launching a new
business as illustrated in Table 1 .
Table 1. Turkey’s Ratings for Starting a Business
Europe &
Indicator Turkey Central Asia OECD
The total number of procedures required to register a firm 6 5 5
The total number of days required to register a firm 6 12.8 11.1
Cost is recorded as a percentage of the economy’s income per capita 12.7 6.7 3.6
The amount that the entrepreneur needs to deposit in a bank or with a notary
before registration and up to 3 months following incorporation (recorded as a
percentage of the economy’s income per capita) 13.2 3.5 10.4
Source : World Bank Doing Business Report (2014)
Financial challenges: As in most developing economies,
financial difficulties are very common for most of the
SMEs in Turkey. Due to collateral, personal and financial
statement-related problems in utilizing bank loans and low
levels of equity, SME credits are still at a low level of
around 25% , which is an important factor behind the low
technological capacity and less modernized production
facilities of SMEs. Alternate sources of finance such as
angel investors, credit guarantee funds and venture capital
companies are insufficient and most of the time,
inaccessible, for SMEs in Turkey. In addition to that,
background and knowledge level of SME owners, play an
important role financial problems of SMEs. As most SME
owners/managers come from a technical or engineering
background, their knowledge about finance and accounting
is most cases, is significantly limited. Whilst that, most
SME owner/managers refrain from hiring professional
finance managers for not delegating their “managerial
power”, which causes their financial problems to grow and
even threaten the survival of their enterprises.
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Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
Previous studies have shown that, among these
several problems, challenges related with financial
decisions and actions have a strategic importance for SMEs
in Turkey, as the efficient and effective conduct of financial
management has the potential to elevate or diminish the
performance of a small and medium sized company (Öndeş
and Güngör, 2013; Şahin, 2011; Çetin, Akyüz and Genç,
2011; Güler, 2010; Koyuncugil and Özgülbaş, 2008).
Regarding the financial management challenges, the
following section analyzes the major practices of financial
management conduct in Turkish SMEs, from a fresh
strategic management perspective.
3 . Strategic financial management practices
Strategic Management in SMEs
Strategic management is “a set of managerial decisions and
actions that determines the long-run performance of a
corporation” (Wheelen and Hunger, 2010) As the
description emphasizes, strategic management of an
enterprise concerns with attaining a sustainable positive
performance and contains four basic elements, which are
environmental scanning, strategy formulation, strategy
implementation and evaluation and control. Strategic
management creates “ a clearer sense of strategic vision for
the firm, sharper focus on what is strategically important”
and “improved understanding of a rapidly changing
environment” (Wilson, 1994). Within that respect,
conducting strategic management in SMEs have a crucial
importance as SMEs have to operate and compete within
contexts of high risk and uncertainty.
Zimmerer and Scarborough (2005) describe
“strategic management” in small businesses as “the
process of developing a game plan to guide a company as it
strives to accomplish its vision, mission, goals, and
objectives and to keep it straying off-course” (Zimmerer
and Scarborough, 2005: 65). Strategic management
behavior in small and medium sized enterprises involves
“an attempt to cope more effectively with the great and
rising demands emanating from both outside and inside the
firm by (i) giving the development of the firm a long-range
direction; (ii) formulating and applying an overall concept
of the firm; (iii) generating, implementing, and controlling
basic strategies and sub-strategies; and (iv) utilizing such
special "strategic" tools as strengths/weaknesses analysis
and opportunity/risk analysis, among others” (Pleitner and
Barney; 1989).
The need for applying the methods and
techniques of strategic management in small and medium
sized businesses can be attributed to the changing
conditions of conducting business. Although small
businesses are exposed to higher risks and uncertainty
compared to large sized enterprises, the traditional business
management style of SME owners or entrepreneurs
Hande Karadag
Emerging Markets Journal | P a g e |29
generally tended to overlook the strategic management
processes, which had to go through serious changes with
the developments in the business environment, as the
entrepreneurs and small business owners became more
aware of the challenges and the opportunities of the
contexts they are competing in and the sustainable
competitive advantages their enterprises had to develop, for
reaching their organizational goals (Zimmerer and
Scarborough, 2005). Within that respect, the potential
advantages of a strategic outlook for SME owner/managers,
summarized by Wickham (2006) as: “encouraging the
entrepreneur or small business owner to evaluate and
articulate a vision, ensuring the scanning and analyzing of
the organization and its environment, facilitating the
discovery of
new opportunities and strengths, guiding the restructuring
of the enterprise, guiding the processes of decision making,
within the enterprise, providing a starting point for the
specification of objectives, acting as a common language
for the enterprise’s stakeholders” (Wickham, 2006) were
soon realized by SME owner/managers, to targeted to
maintain a sustainable organizational performance and
improved levels of competitiveness.
In academic studies, until 1980’s the general
perspective of strategic management is regarded to be
broad and non-distinctive among types of businesses,
assuming a general applicability of strategic management
concepts and processes of large firms to all businesses
(Davig,1986). Among the few researchers whose views
contrasted with this generalization were Cohn and Lindberg
(1972), who stated that smaller firms needed specific
strategies for survival and growth, Pleitner, et.al. (1989: 72)
who pointed out the criteria of firm size and entrepreneurial
types as the two bases of distinction between management
of companies, and Carter (1990) who suggested that small
companies faced higher adaptation problems due to “higher
regulatory and competitive uncertainty” (Carter, 1990). In
this new stream of thought, entrepreneur and
entrepreneurial characteristics were considered to be the
core of the discussion. (Dean, Brown and Bamford,1998).
A recent study by Liberman, Jaoni and Hooper (2010)
supported that argument, revealing that, personal
characteristics of SME owner-managers, such as
experience, social relationships, level of information and
ethical values, strongly affects strategic decision-making
processes in micro enterprises, while further models and
analyses regarding the distinctions between large and small
companies were not limited solely to entrepreneurial
characteristics, taking other factors e.g. industry
environment, firm specific competitive behaviour and
strategic decision making processes in these firms, into
consideration. In an empirical study, Chen and Hambrick
(1995) studied 28 US airline companies and found out that,
small business competitive behavior is different from that
of larger firms and suggested that, small firms had higher
speed in initiating strategic behavior but were low-key,
even secretive in their strategy implementation. Following
their study, Dean, Brown and Bramford (1998) conducted
an empirical research on a large sample of US small and
large manufacturing firms, where they found strong
Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
evidence for their proposition that “small and large firms
possess different resources and capabilities that make them
particularly well suited to different environmental
contexts”.
Due to the growing interest to the impact of strategic
management on the improvement of SME performance, the
role of financial decisions and actions within the overall
strategic management system is becoming more popular
among the scholars, particularly after the introduction of
the recent strategic financial management theory by Liu, in
2010. The theory and its implications on the practices of
financial management both at the international context and
in Turkey, are analyzed in the following section.
Strategic financial management practices
After the studies showing that “The main causes of
business failure are the lack of financial planning, limited
access to funding, lack of capital, unplanned growth, low
strategic and financial projection, excessive fixed-asset
investment and capital mismanagement”
(Salazar,Soto&Mosqueda, 2012), the concept of strategic
financial management practices in enterprises started to
gain popularity among researchers.
Strategic financial management (SFM) refers to
“financial management theories according to which
financing should be conducted in the most proper way, the
collected capital should be utilized and managed in the
most effective way in enterprises and decisions on the
reinvestment and distribution of profits should be made
most reasonably” (Liu, 2010). Strategic financial
management consists of “financial strategies which are
goals, patterns or alternatives designed to improve and
optimize financial management in order to achieve
corporate results” where financial strategy “represents a
path to achieve and maintain business competitiveness and
position a company as a world-class organization”
(Salazar,et.al, 2012).
Studies show that, despite the importance of
strategic thinking and implementation on the conduct of
financial management in SMEs which have to operate in
contexts of high risks and uncertainty with limited
resources, SME owner/managers regard production/service
or marketing functions as priorities particularly in the start-
up phase of new ventures, which eventually results with
poor financial management, and in most cases failure of
business (Jindrichovska, 2013). It is also reported that,
SME owners or entrepreneurs, until recently have a general
tendency to overlook the elements of strategic management
(Zimmerer and Scarborough, 2005), whereas the lack of
“strategic outlook” in the financial issues is a major threat
on the longevity of SMEs as “many of the factors that
contribute to failure can be managed properly with
strategies and financial decisions that drive growth and the
organization’s objectives” (Salazar, Soto, Mosqueda,
2012). While SMEs are reportedly more distant from
Financial Management Challenges In Small and
Medium-Sized Enterprises: A Strategic Management Approach
traditional “deliberate” approach of strategic management
which strictly requires the formal planning and controlling
activities, their chaotic environment and the limited
resources force them to be much closer to the “emergent”
strategic management approach led by Mintzberg (1994),
which is more flexible, leaving room to changes and
developments in the environment. However, the need for
the deliberate (planned) strategic management is evident in
the phases of environmental scanning and the strategy
formulation, while the emergent approach can be argued to
be useful in the strategy implementation phase for small
and medium sized companies.
Within the financial management literature, there
has been a considerable amount of research focusing
classifying of main constructs of financial management.
Among these, Mc Mahon, Hutchinson and Forsaith (1993)
have been leading researchers, analyzing and categorizing
the practices of financial management in Australia, UK and
US SMEs. Later, various scholars worked on several
aspects of financial management practices in different
contexts (Okafor,2012; Chung and Chuang, 2011;
Hunjra,Butt,Rehman,2010; Pham,2010; Nguyen 2001).
With regard to the independent variable of financial
management practices in these studies, in contrast to the
previous studies advocating a general categorization for the
elements of financial management, Butt, Hunjra & Rehman
(2010) argued that, major constructs of financial
management practices in SMEs can vary from one country
to another, depending on the development of the context of
corporate sector. Empirical studies conducted on SMEs of
different countries supported their argument, indicating
existence of a significant variance among the major
constructs of financial management practices in different
contexts of research. For example, Peel and Wilson (1996)
regarded capital budgeting and financing activities as the
major elements of financial management practices for small
businesses in UK, while Nguyen (2001), conducting a
research study on Vietnamese SMEs, argued that the
practices which are more related to the profitability and
performance of SMEs in Vietnam are the practices related
to the ‘accounting information systems, financial planning,
working capital management, fixed-asset management and
financial reporting and analysis” (Nguyen, 2001). Later,
Kennedy and Tennent (2006) used “financial record
keeping” the general indicator of financial management
conduct in small businesses in Australia’ and Butt, Hunjra
and Rehman addressed “capital structure decision, dividend
policy, investment appraisal techniques, working capital
and financial assessment” as the most common financial
management practices in Pakistan (Butt, Hunjra &
Rehman, 2010). In Turkey, studies conducted up to date on
financial management of SMEs, indicate both similarities
and diversifications with regard to previous studies
conducted in other contexts, which is explained in detail in
the following section.
Interestingly, no research study, to date, attempted to
analyze the variances in the practices of financial
management in SMEs within different contexts and
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Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
approach the conduct of these practices from a strategic
management viewpoint, taking the influence of these
practices on organizational performance, as a base. The
following section presents a conceptual model as a new
perspective of looking at the financial conduct in small and
medium sized companies, by firstly identifying the
“strategic” practices of financial management in Turkey,
followed by a discussion on their interrelationships and
their impact on organizational performance.
4. Strategic financial management practices and SME
performance
In Turkey, as in most developing economies, lack of capital
and poor access to finance are considered as the main
financial challenges for small and medium sized companies
(Öndeş & Güngör, 2013; Şahin, 2011; Çetin, Akyüz &
Genç, 2011; Güler, 2010; Koyuncugil & Özgülbaş, 2008).
While Turkey experienced the greatest expansion in SME
lending among OECD countries within the period of 2007-
2011, the proportion of the SME share in total credits is
still significantly below the SME credit utilizations of the
developed economies (OECD, 2012).
Whilst commercial banks are still the most
common sources of SME finance in Turkey mainly due to
the underdevelopment of venture capital and credit
guarantee systems, problems related to collateral,
credibility and financial statements inhibit the effective
utilization of banks loans by the SMEs. Therefore, majority
of Turkish SMEs finance their working capital needs by
either using equity financing (Şahin, 2011) or other
external sources such as family financing or individual
loans (KOSGEB, 2011). Regarding other challenges related
to financial management, inefficient use of financial
resources (Uluyol, 2013) and insufficient working capital
management in terms of cash inventory and receivables
management constructs, are reported as key financial
challenges for SMEs in Turkey. Among these, cash-flow
problems have a unique situation, as the deterioration of
cash-flow in an enterprise causes the owners to finance
daily operations with equity capital or personal funds, and
when this situation continues for long, the melting equity
capital threatens the survival of an enterprise (KOSGEB,
2011). In addition to that, an efficient inventory
management is stated to lead to improved competitiveness
in SMEs (KOSGEB, 2011). The importance of cash and
inventory management for SMEs in Turkey is also well
documented in other studies (Uluyol, 2013; Kaya &
Alpkan, 2012). As other important constructs, insufficient
overall and financial planning, lack of feasibility analyses
before making investment decisions, inadequate keeping of
financial records and lack of analyses of financial reports
due to insufficient financial knowledge of SME
owner/managers, are among the main problem areas of
SMEs in Turkey, with respect to financial management
(Kaya & Alpkan, 2012; Alkış a& Temizkan, 2012;
Güler,2010; Kutlu & Demirci, 2007; Arslan, 2003).
Hande Karadag
Emerging Markets Journal | P a g e |31
As Turkish SMEs are mainly dependent on
external sources of funding, previous literature on financial
problems and practices of SMEs in Turkey, has mainly
focused on funding challenges in SMEs (Uluyol, 2013;
Koyuncugil & Özgülbaş, 2008; Topal, Erkan & Elitaş,
2006; Arslan, 2003), leaving the research area of other
important financial management constructs of SMEs
significantly neglected, up to date. The following findings
have been reported as the results of some of the empirical
studies regarding financial management practices of SMEs
in Turkey:
Çakır (2013) studied 58 manufacturing
companies in Turkey and found out that higher cash
conversion cycle is associated with higher profitability
(Çakır, 2013).
Güngör and Öndeş (2013) conducted a research
study on 30 SMEs in Erzurum region of Turkey. Their
findings indicated that, lack of financial management
knowledge and collection of receivables in working capital
management are among the most common financial
problems in SMEs In addition to that, 97% of these SMEs
used equity financing instead of debt financing, and
capacity utilization ratio in these SMEs were found to be
very low, causing significant amounts of financial losses
and decreases in the rate of employment. (Öndeş and
Güngör, 2013).
Uluyol (2013) implemented an empirical research
on financial management practices of 260 SMEs in
Kahramanmaraş, Hatay, Şanlıurfa, Adıyaman and
Gaziantep cities of southeastern region of Turkey. The
findings implied that, the conduct financial management
practices is “unsatisfactory” in SMEs, as most practices are
reported to be “partially” undertaken. The major
implication of the research study was the reporting of a
general lack of financial knowledge in practices of financial
management.
Güler (2010) investigated the working capital
management and other financial management practices in
111 SMEs in Ankara region of Turkey and found that
SMEs mostly use the payback period method, when
making fixed-asset investment decisions. The findings also
indicate that, SMEs have the highest regard for the
collection of receivables and cash flow management, as
practices of working capital management.
Çetin and Bıtırak (2009) carried out an empirical
study about financial management, working capital and
investment budgeting practices of 40 SMEs in Antalya city
of Turkey. Findings of their research indicated that, follow-
up of doubtful receivables and managing cash are the basic
working capital management practices in SMEs, while
payback period method is the most widely used method in
fixed-asset investments.
Çetin, Akyüz and Genç (2008) conducted a
research on SMEs in Usak city of Turkey and found out
that 80% of the SMEs did not have a finance department,
Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
and majority of them faced difficulties at collecting their
receivables and utilizing bank loans, while 85% had to
postpone their investment plans during the economic crisis
period of 2008-2009.
Koyuncugil and Özgülbaş (2008) studied the
financial data of 697 SMEs which are quoted to İstanbul
Stock Exchange. The findings of their analysis presented
that, 62% of these SMEs’ financial performance was weak,
compared to with the others. The SMEs with lower scores
had the common problems of low ROE and net profit
margin, faced difficulties in the collection of receivables
and had financial management problems (Koyuncugil and
Özgülbaş, 2008).
Çetin (2006) studied financial management,
working capital and fixed-asset budgeting practices of 42
SMEs in Antalya and Isparta cities in the Mediterennian
region of Turkey. Findings of the study indicated that the
SME owner/managers are not well- informed about money
and capital markets, as well as about basic concepts of
financial management. About the practices of working
capital management, SMEs considered collection of
receivables and practices of inventory management, as
important. SMEs also regarded acquisition of basic
machinery and equipment, as their core investments in
fixed-assets.
Topal, Erkan and Arıtaş (2006) conducted a study
about financial management practices of 48 SMEs in
Afyonkarahisar city of Turkey. Findings of their study
indicated that, machinery and equipment acquisitions,
conducted with the motivation of growth of business
volumes, are the basic fixed-asset investments and SMEs
use profitability and pay-back analyses in assessing their
fixed-asset investments. SMEs also reported frequent uses
of working capital management practices, most important
ones being receivables and inventory management, but also
including cash budgeting and follow-up of periodical
monetary target
While the literature on SME strategic
management suggests that SME owner/managers do not
always employ the processes of strategic management
when running their businesses (Zimmerer & Scarborough,
2005), the empirical studies conducted on financial
management constructs of Turkish SMEs present indicators
of employment of an “emergent” approach of strategic
management at the implementation phase of the conduct of
financial management practices, particularly when
managing daily financial operations and during processes
of large investments. On the other hand, the
owner/managers of SMEs experience problems in taking a
“deliberate” approach of strategic management, regarding
the strategy formulation and feedback and control phases of
financial management, which results in poor financial and
overall organizational performance results. The flow of
financial management practices and the phases deliberate
and emergent illustrated in the strategic management model
of financial management practices in SMEs, as shown in
Financial Management Challenges In Small and
Medium-Sized Enterprises: A Strategic Management Approach
Figure 1. Within the three basic phases of strategic
financial management, SME owner/managers in Turkey
tend to have a higher regard for the implementation phase
of financial management practices, such as paying more
attention to the daily transactions related to various
working capital management practices including cash,
receivables, inventory and accounts payables management,
as well as making detailed evaluations before making
fixed-asset investments. This indicates that, the “emerging”
approach of strategic management which also facilitates
finding immediate solutions to unanticipated financial
problems with its unstructured and flexible nature is
common among Turkish SMEs, in their conduct of
financial management. On the other hand, the “deliberate”
strategic management approach, regarding the elements of
strategy formulation and control, is found to be in much
lower levels, as most SME owner/managers reportedly do
not show a great interest or lack the technical knowledge
related with the financial planning and the financial
reporting and control practices, which eventually become
significant factors of poor performance results and even
failure of business.
The flow and interrelationships of the strategic
financial management practices with respect to SME
performance are illustrated in the strategic management
model of financial management practices in Figure 1. The
strategic financial management elements of the model,
namely financial planning, working capital management
with three sub-constructs of cash, receivables and inventory
management, fixed-asset management and finally,
financial reporting and control, are determined according to
the significance of their correlations with the overall
performance of the company, as regarded by the SME
owner/managers. Other elements of financial management,
such as accounting information systems, are not included in
the model, as these practices have been reported by the
SME owner/managers, as being significantly correlated
with SME performance in Turkey.
Figure 1: Strategic management model of financial
management practices in SMEs
Page |32| Emerging Markets Journal
Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
The inadequacy of an effective and efficient
conduct of financial management and the challenges
regarding main practices of financial management in
Turkish SMEs are well documented in several studies
(Uluyol, 2013; Koyuncugil & Ozgulbas, 2008; Cetin,
2006). Therefore, the conceptual model is designed to
identify the key practices of financial management and
deriving proposals about how the model can be used as a
“strategic tool’ for overcoming the financial management
problems in order to attain a higher organizational
performance in small and medium size companies.
Strategic financial planning: Problems related with access
to financial resources are vital for Turkish SMEs. However,
studies show that the planned, accurate and goal-oriented
utilization of the acquired funds is more critical for a
successful SME performance (Uluyol, 2013). A high regard
for financial planning resulting with the development of “a
solid financial plan” (Zimmerer and Scarborough, 2005) is
considered as the key for launching and operating a
successful enterprise, as the lack of financial planning and
projection is argued to be one of the major causes of
business failures, particularly in SMEs (Malette, 2006).
Within the overall financial management system, financial
planning can have several major functions, such as raising
the required capital for the start-up phase of the enterprise
or efficient and effective management of enterprise’s daily
operations. Any process of strategic management starts
with “strategy formulation”, where environmental scanning
is undertaken for identifying the factors which have the
potential to affect the organization’s survival and success,
followed by the formulation of strategies for reaching
organizational goals. While the conduct of financial
planning is executed when managing daily operations of
the company, such as making deciding on the receivables
collection period or bank credit maturities and amounts, a
more strategic outlook adds a ‘long-ranged view’ and
‘goal-orientation’ elements to overall managerial
perspective, resulting with the direction and focusing of the
limited financial resources towards the required ends.
Therefore, this “seeing the big picture” and formulating
financial plans and actions accordingly, contributes to the
improvement of both financial and overall performance of
the company, to a large extent. This phase is very critical
for every company, as lack of strategy formulation results
in a “going with the flow” style of management and
eventually ineffective and inefficient use of resources and
low organizational performance. Formulation of financial
strategies is important for small and medium sized
companies as well as large corporations, as SMEs have to
compete with very limited resources in contexts of high
risk and uncertainty. Therefore, it can be proposed that, an
effective and efficient strategic financial planning would
result with improved performance in small and medium
sized companies.
Hande Karadag
Emerging Markets Journal | P a g e |33
Proposition 1 : Strategic financial planning has a positive
impact on SME performance.
Strategic working capital management: Working capital
management has a particular importance for firms in
emerging markets, as the companies operating in these
countries are mostly SMEs who have limited access to
long-term capital markets, therefore are much reliant on
owner financing,, trade credits and inventories to finance
their funding requirements for cash, accounts receivables
and inventories (Abuzayed, 2011). Studies show that, in
Turkey, as in most developing economies, cash, receivables
and inventory management are the key areas of financial
management where SME owner/managers allocate most of
their time as they regard these practices as “strategic” for
their enterprises. Despite this high managerial awareness,
interestingly, most business failures are reported to result
from the ineffective and inefficient management of
working capital, particularly cash and receivables (Uluyol,
2013; Kaya and Alpkan, 2012), implying the presence of
serious deficiencies in the strategic thinking and
implementation processes regarding the management of
working capital. As the follow-up and collection of
doubtful receivables and bad debts, the management of
inadequate or excess cash and the finding and keeping of
optimum levels of inventory are highly important for the
survival and performance of small and medium sized
enterprises, SME owner/managers create snapshot solutions
to immediate crises at these areas. Therefore, it can be
argued that they tend to apply a more emergent strategic
management approach when dealing with conflicts and
problems about the management of working capital. The
key point therefore, which would differentiate a successful
and highly performing SME from an unsuccessful one, is
how effectively and efficiently the process of strategic
management is carried out by the SME owner/managers.
Empirical studies show that, the profitability of the
enterprise can be increased by accurately managing the
cash in and out movements, besides minimizing the amount
of excess cash (Block and Hirt, 2004) or reducing the
number of days of cash collection period, showing that the
enterprise has the ability to shorten its receivables
collection period or lengthen its accounts payable period
(Cakir, 2013; Gul, et. al, 2013). Efficiency and
effectiveness in inventory management is the final critical
factor in working capital management in SMEs as
inventories generally form the largest asset on the balance
sheet. SME owner/managers are more prone to utilize the
“observation method” for detecting the amount of
inventory, which causes them to face problems due to
having too much or too little inventories, resulting with
either low customer satisfaction or high costs of financing
excess levels of inventory (Hodgetts and Kuratko, 1998).
However, in Turkey, management of inventories has the
least managerial priority compared to cash and receivables
management, which constitutes the other important reason
for high inventory costs, decreasing profitability and
eventually poor financial performance (Cetin, 2006; Topal,
Erkan & Arıtaş, 2006). Combining the influence of the
three key factors of working capital management over SME
performance, it can be stated that, an SME which has a
Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu
higher regard for a strategic approach when managing its
working capital would be more successful in terms of
financial and overall performance.
Proposition 2: Strategic working capital management has a
positive impact on SME performance.
Strategic fixed-asset (capital budgeting): Despite that the
decision about whether to make a fixed-asset investment is
crucial to SMEs regarding the impact of this decision on
the long-term cash-flow of a small or medium sized
company, lack of a well-structured strategic approach when
making fixed-asset decisions is a major problem area for
SMEs operating in Turkey (Guler, 2010; Çetin & Bıtırak,
2009). As generally the funds tied to the acquisitions of
fixed-assets, such as buildings or equipment, are in large
amounts with long maturity periods,, problems in fixed
asset investment decisions potentially carry the risk of
threatening the cash requirements of daily
production/service operations, particularly when the cash-
flow impact is not clearly analyzed before making the
investment. A careful and detailed technical evaluation is a
major requirement for making a successful fixed-asset
acquisition, as in most cases, the contribution of the
investment to the overall productivity and performance of
the company becomes highly questionable without a
feasibility analysis conducted beforehand. As the basic
motivation behind fixed-asset investments in small
businesses is “to increase the efficiency, thus profitability
of the enterprise” (Zimmerer and Scarborough, 2005), the
errors and deficiencies in making these decisions and acting
accordingly harm the profitability thereby the financial and
overall performance of the company, while inadequate
investments towards having more advanced production or
service facilities limits the growth of the organization,
which underline the importance of a strategic outlook when
taking and implementing fixed asset investment decisions.
The outcomes are likely to be more positive when these
vital decisions are made considering the organizational
goals such as growth or profitability and directing the
limited resources accordingly, starting with the basic
questions of “how much that investment is needed for a
better overall performance?” and “how can we allocate our
limited resources to this investment in the best way
possible, if that investment is a requirement for our short
and long-term goals and objectives?”. This way, the means
and ends would be managed in a more proper way, in terms
of maximizing the effectiveness and efficiency of the fixed-
asset acquisition.
Proposition 3 : Strategic fixed-asset management has a
positive impact on SME performance.
Strategic financial reporting and analysis: In Turkey, the
inadequacy of financial literacy of SME owners and the
impact of that problem area on poor managerial and overall
performance of SMEs is well documented in various
studies (Uluyol, 2013: Kaya & Alpkan, 2012, Cetin, 2006).
Financial reports and statements, particularly main
statements such as balance sheet, profit and loss statement
Financial Management Challenges In Small and
Medium-Sized Enterprises: A Strategic Management Approach
and cash flow statement, are “powerful tools” small
business owners can use in managing their companies
(Hogetts and Kuratko, 1998). However, mostly due to the
inadequacy of accounting and finance knowledge of SME
owner/managers, studies show that, only 11% of small
business owners/managers “analyze their financial
statements as part of the managerial planning and decision-
making processes” (Zimmerer and Scarborough, 2005).
Evaluation of financial reports presenting the trends and
snapshots of past and current financial performance of the
company act as the “control and feedback” function of
strategic financial management process., thus, lack of
information on the financial situation and crucial
performance indicators threatens the overall awareness of
the company owner required for a sound strategy
formulation and implementation., whereas the performance
of the enterprise is positively impacted when this important
follow-up function is executed on a timely, rational and
knowledge-based basis. Therefore, it can be proposed that,
the utilization of a “deliberate” strategic management
approach, resulting from the formal and rational nature of
the feedback and control phase of the strategic
management, would significantly improve of SME
performance, by pointing out the red and green signals
about the past and current major financial performance
indicators such as sales growth, profitability or debt/total
assets ratio and about the optimum and actual levels of
critical balance sheet items such as cash, receivables,
inventory, payables and fixed-assets, when managing the
financial operations of the company.
Proposition 4: Strategic financial reporting and control has
a positive impact on SME performance.
4 . Discussion and conclusion
The significance of SMEs in the social and economic
context, have been recognized worldwide, particularly after
1980’s, and since then, factors affecting the development
and growth of SMEs have been among the key concerns of
public authorities, academicians and business circles.
Although a number of empirical studies investigated
various financial management practices and their impact on
organizational performance in different countries, the main
focus of previous SME finance literature, particularly in
developing countries, have been the challenges SMEs face
to access to financial resources. However, the efficient
utilization of the obtained funds, such as having a sound
cash management system, is equally important, for the
survival of SMEs. Thus, the shift of research on financial
management in SMEs from the one-dimensional “funding
focus”, towards a more comprehensive “strategic financial
management” perspective has the potential to provide
positive implications for academics and policy makers, as
Page |34| Emerging Markets Journal
Volume 5 No 1 (2015) | ISSN 2158-8708 (online) | DOI 10.5195/emaj.2015.67 | http://emaj.pitt.edu

well as practitioners of SME financial management in Arslan, Ö. (2003). Küçük ve Orta Ölçekli
terms of introducing new dimensions and factors to the
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The conceptual model, which is designed to present Bazı Finansal Yönetim Uygulamaları.
how the strategic management practices are interrelated
with each other and with the overall organizational Cumhuriyet Üniversitesi, İ.İ.B.F.
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